The Motley Fool Glossary

Definitions A - C

No one likes jargon, especially when it comes to talking about finances. If you've come across any terms you don't understand, you may find them explained here. Perhaps one or two of these definitions will bring a wry smile to your face. Not a belly laugh, nor a throaty roar of delight. Or even a hearty chuckle, you understand. Just a wry smile. Still, that's not bad for a collection of explanations of financial terms.

One who records and/or examines the finances of individuals or businesses. Someone who comes in very handy at tax time.

Accounting earnings

A company's earnings as reported on its income statement.

Accounting insolvency

A situation in which total liabilities exceed total assets. A company with a negative net worth is insolvent on the books.

Accounting liquidity

The ease and speed at which assets can be converted to cash.

Accounts payable

Money owed by a company to suppliers.

Accounts receivable

Money owed to a company by customers that have purchased goods and/or services on credit. Accounts receivable is listed as an asset on the balance sheet, as it is a number that will (presumably) be turned into cash by the company as the receivables are paid off.

Accounts receivable turnover

A measure of how quickly customers pay their bills. Accounts receivable turnover is sales for the period divided by the average accounts receivable. Also called receivables turnover.

Accredited investor

Someone who is supposed to know a lot about investing, and who meets certain income and net worth criteria, as established by the SEC. Being an "accredited investor" is sometimes a requirement for certain limited partnership investments.

Accrual basis

An accounting method where income is reported when earned and expenses are reported when incurred. This is in contrast to cash-basis accounting, which reports income when it is actually received and expenses when they're actually paid.

Expenses incurred during a given accounting period for which payment has not yet been made.

Accrued interest

Interest that has accumulated on a bond since the last interest payment was made.

Accumulated dividend

A dividend that is due and owed to a preferred stockholder, but has not yet been paid.

Accumulated earnings

Retained earnings.

Accumulated earnings tax

A tax on earnings retained by a business to avoid paying the higher income taxes that would be due if the earnings were paid out to the owners as dividends. Also known as an accumulated profits tax.

Accumulation

Buying shares over a period of time. For an individual investor, this just means buying additional shares of a stock you already own. For an institution, however, it may mean making a series of purchases rather than one large purchase that could drive up the market price.

Accumulation period

In retirement parlance, the years when one is making regular contributions to a retirement plan or deferred annuity. The period is considered to end when the income payments begin. See generally: Retirement Planning: How to Retire in Style.

The cost of equipment or property after it has been adjusted for any incentives, discounts, or closing costs, but before sales tax.

Acquisition of assets

A merger or consolidation in which an acquirer buys a company's assets.

Acquisition of stock

A merger or consolidation in which an acquirer buys a company's stock.

Active management

Any investment strategy that involves picking individual securities with the goal of either beating the market's returns, or lessening the risk of following the market. In the context of mutual funds, active management refers to any non-index funds. The vast majority of actively managed mutual funds fail to outperform index funds, and we recommend Fools not invest in actively managed mutual funds. See Index funds.

A mutual fund that seeks long-term capital growth by investing primarily in stocks of fast growing smaller companies or narrow market segments, such as "the technology sector" or "the Internet sector." Sometimes called a capital appreciation fund.

Allowance for bad debt

Money reserved to cover the possibility of a nonpaying customer. A company may be forced to convert a portion of accounts receivable into a loan if one of its big customers gets in financial trouble.

A receipt for the shares of a foreign-based company held by a U.S. bank that entitles the shareholder to all dividends and capital gains of the underlying stock. ADRs trade similar to stocks on U.S. exchanges, and provide a way for Americans to invest in foreign-based companies by buying their shares in the U.S. instead of through an overseas exchange.

Founded in 1842 in New York City, the American Stock Exchange is one of the three major stock exchanges in the U.S. along with the New York Stock Exchange and the Nasdaq. It was acquired by the Nasdaq in 1998, but still operates as separate exchange.

The systematic repayment (e.g., monthly, quarterly, or yearly) of a debt or loan, such as a bond or mortgage, over a specific time period.

Amortized value

The value of a security as determined by the process of amortization.

Amount recognized

The amount of a capital gain that is reportable and subject to tax.

AMT

Alternative minimum tax.

Analyst

A financial professional who analyzes securities to determine their investment merits, including possibly a "fair" or "intrinsic" value for them. The term is generally applied to almost any professional investor who does research of some kind. There are "sell-side" and "buy-side" analysts. "Sell-side" analysts typically work for investment banks and brokerages and sell or publish their analysis. "Buy-side" analysts typically work for the mutual fund companies or institutions that use the analysis to make investment decisions for the funds they manage.

Annual effective yield

The measure of the actual annual rate of return on an account after interest is compounded.

Annual report

The corporate financial statement that shareholders eagerly await each year. These reports are required by Securities and Exchange Commission regulations and frequently include impressive color pictures of the CEO smiling, regardless of whether the company has had a year to smile about or not.

Annualize

To make a period of less than a year apply to a full year to facilitate comparative analysis. For example, to annualize quarterly results, you multiply them by four. This can lead to incorrect assumptions when employed for analyzing companies in industries with strong seasonal or cyclical sales trends.

Annuity

A contract between an insurance company and a person that provides for periodic payments to the individual or designated beneficiary in return for an investment. Typically, an annuity agrees to provide payments to the purchaser of the contract (annuitant) beginning at some point in the future. Annuities are typically very poor investments, and Fools generally avoid purchasing them. Insurance companies typically push selling them very hard since they usually have high fees. For more information, see Annuities: What's to Like?.

Appreciation

An increase in the price or value of an asset. Appreciation is one component of total return.

The price at which a prospective seller is willing to sell a security. See also: Bid.

Asset

Anything that has monetary value. Typical personal assets include stocks, real estate, jewelry, art, cars, and bank accounts. Corporate assets are found on the company's balance sheet and include cash, accounts receivable, short- and long-term investments, inventories, and prepaid expenses.

Asset allocation

Dividing investment dollars among various asset classes, typically among cash investments, bonds, and stocks. Wall Street firms frequently change their "model asset allocation" portfolios -- ostensibly to show that they have recalculated the best method for balancing the risks involved in holding various investments. This also, however, results in additional commissions from clients who follow the "model portfolios" and sell various assets to rebalance their portfolios.

Asset allocation fund

A mutual fund that, as market conditions change, consistently rebalances its investments among the major asset classes (stocks, cash, and bonds).

Asset classes

The three major asset classes are cash (also called cash reserves, money market instruments, or moolah), bonds, and stocks.

A method in which the dividends or other earnings from an investment are used to buy additional shares in the investment vehicle. Dividend Reinvestment Plans (Drips) are one example. See Drip Portfolio.

Average maturity

The average of all maturity dates for securities in a money market or bond fund. The longer the average maturity, the more volatile a fund's share price will be, moving up or down as interest rates change -- which they do every day.

A pernicious and usually not fully explained sales fee charged by some mutual funds when an investor sells fund shares. Also called a contingent deferred sales charge. Before you purchase a mutual fund, make sure you find out all fees that are included -- including those you might have to pay when you sell.

When a company is unable to pay its debts, it is bankrupt. Such a company often files for Chapter 11 bankruptcy protection, which allows it to continue to operate while it reorganizes.

Basis point

Most often used relating to changes in interest rates. One basis point is 1/100 of a percentage point.

Bear

A person with a generally pessimistic market outlook or a pessimistic view on a sector or specific stock.

Bear market

When the overall market loses value over an extended period of time. There is no "official" definition of what makes a bear market, though many feel a drop of at least 10% is needed. A drop of something less than 10% is often called a "correction" (even though the term "correction" is never used when the market moves up 10%).

Contributions made to a retirement plan -- such as a 401(k) or 403(b) -- before federal income taxes are deducted, reducing one's gross income for federal tax purposes. See Is Your 401(k) Foolish?

Beta

A measure of the relative volatility of a stock or other security as compared to the volatility of the entire market (usually measured by the S&P 500 index). A beta above 1.0 shows greater volatility than the overall market, and a beta below 1.0 is less volatile.

The price a prospective buyer is willing to pay for a security. See also: Ask.

Bid-ask spread

The difference between what a buyer is willing to pay (bid) for a security and the seller's asking price (ask).

Blue-chip stocks

Really good, large companies -- often Dow components -- that have been around long enough to have a solid history of rewarding shareholders. Think Coca-Cola, IBM, General Electric, General Motors, and Johnson & Johnson.

Board of directors

A group of people elected by a corporation's shareholders to oversee the management of the company. The board members meet several times each year, are paid in cash and/or stock, and take on legal responsibility for corporate activities. Also called directorate.

Bond

An interest bearing or discounted debt security issued by corporations and governments. Bonds are essentially loans by the investor to the issuer in return for interest payments.

Bond fund

A mutual fund that invests in bonds.

Book value

A company's assets, minus any liabilities and intangible assets. Book value is literally the value of a company that can be found in the accounting ledger and is often represented as a per-share value by taking the company's shareholder equity and dividing by the current number of shares outstanding.

Bottom line

The bottom line on a business's income statement shows its actual profits according to generally accepted accounting principles (GAAP). Hence the all-important phrase -- "What's the bottom line?" See also: Net profit and Net profit margin.

Broker

One who sells financial products. Whether in insurance, real estate, or stocks, most brokers work under compensation structures that are at direct odds with the best interests of their clients. When using a broker, you should always find out how he or she is compensated.

Bull

A person with a positive or optimistic outlook for the general market, a market segment or industry, or for particular stocks (e.g., a Coca-Cola bull). (Slang: an exaggerated or untrue statement.)

Bull market

A market that has been gaining value over a prolonged period.

Buy-and-hold

A strategy that employs buying shares of companies with the intention of keeping those holdings for a long time, preferably indefinitely, and participating in the long-term success of being a partial owner of the business underlying the stock. Our favorite investing method by far.

An option contract that grants the buyer the right, but not the obligation, to buy the optioned shares of a company at a set price (the "strike price") for a certain period of time. If the stock fails to meet the strike price before the expiration date, the option expires worthless. You buy a call option if you think the share price of the underlying security will rise, or sell a call option if you think it will fall. Selling an option is also referred to as ''writing'' an option. The option seller is called the writer.

Capital

A business's cash or property, or an investor's pile of cash. See also: Asset.

Capital appreciation

One of the two components of total return, capital appreciation is how much the underlying value of a security has increased. If you bought a stock at $10 per share and it has risen to $13, you have enjoyed a 30% return or appreciation on the original capital you invested. Dividend yield is the other component of total return.

Capital gain/loss

The difference between the price at which an asset is sold and its original purchase price (or "basis").

Capital gains distributions

Payments, typically made in December, to mutual fund shareholders of gains realized through purchases and sales by the mutual fund during the year. Because these capital gains distributions are sometimes substantial, check with the mutual fund you are considering investing in and avoid buying shares of mutual funds just prior to a capital gains distribution.

Capital growth

An increase in a stock's or bond's price. Sometimes called capital appreciation.

A brokerage account that settles transactions on a cash basis with no opportunity for the account holder to use credit (margin). See also: Margin account.

Cash and cash equivalents

The first line of a corporate balance sheet is always named this, or some similar phrase. It refers to the amount of money that a company has sitting in the bank. It may also include marketable securities, such as government bonds and banker's acceptances. Cash equivalents on the balance sheet may include securities that mature within 90 days.

Cash flow

A measure that tells an investor whether a company is actually bringing cash in to the company's coffers.

Cash flow statement

A financial statement reflecting the monies that go into and out of a business, and the timing of those movements. The cash flow statement reports on cash inflows and outflows in a company's operations, investments, and financing activities.

The head officer of a corporation's board of directors. This person often has executive authority over the company. See also: Board of directors.

Charge off

A loss that is written off a company's books when a lender determines it will be unable to collect from the debtor.

Chart

A graph showing how the price of a given stock has changed over time. Other data is often included, such as volume data. Many people claim to be able to divine extraordinary information about the future performance of a stock by consulting charts about the past. Fools don't believe this can be done on a consistent basis.

Someone who has passed competency standards -- as determined by the Institute of Chartered Financial Analysts -- in securities, portfolio management, economics, and financial accounting.

Chief Executive Officer (CEO)

The CEO is the highest executive officer in a corporation, sort of like the captain of a ship. He or she is accountable to the company's board of directors and is frequently a member of that board. The CEO participates in setting goals with the board and other officers and is responsible for the strategies and tactics employed to meet the corporation's goals.

Churn

Churning is unconscious or conscious overtrading by a broker in a customer's account. Since brokers are most often compensated by the number of transactions made on a customer's behalf, there is temptation to trade too frequently, whether that's in stocks, bonds, or mutual funds with loads.

Closed-end fund

A mutual fund that has a fixed number of shares and is typically listed on a major stock exchange. These funds often trade perpetually at a discount to their net asset value (NAV). See also: Open-end fund.

Closing price

The last trading price of a stock when the market closes for the day.

Cold call

It's cold because the person calling doesn't know you from a snowdrift. To build a book of business, many new brokers must call people they don't know and try to sell an investment idea or their services as a broker. Cold calls are a good reason not to answer the telephone around dinner time.

Commercial paper

A promissory note issued by a large company to secure short-term financing.

Commission

A fee charged by a broker for executing a securities transaction. One of the principle things investors should watch for when selecting a brokerage. "Full-service" brokers can have commissions running as high as $150 per trade or more, while discount brokers average less than $20 per trade. See also: "How to Choose a Discount Broker."

Commodities

Goods such as grains, silver and other precious metals, and minerals traded in large amounts on a commodities exchange.

Common stock

A security representing partial ownership in a public or private corporation.

A preferred stock or corporate bond that can be exchanged for shares of the company's common stock at a predetermined price or rate.

Correction

A short-term drop in stock market prices. The term "correction" comes from the notion that, when this happens, an overpriced individual stock, market segment, or stocks in general are returning back to their "correct" values. The term, for reasons that elude us, is never used when a stock or the stock market returns to a higher level after momentarily visiting a lower level.

Cost basis

The original price paid for an investment (including commissions).

Cost/benefit analysis

An attempt to determine the feasibility of embarking on a project by quantifying its anticipated costs and benefits.

A market crash is a big drop in market value. It is what many shorter-term focused investors always worry about. The stock market never goes up in a straight line, so there will always be crashes. It can take a few days, months, or even years for a market to recover after a crash.

Credit

Money loaned. It also refers to the borrowing capacity of an individual or company.

Credit history

The record of how well an individual or company has, in the past, repaid borrowed money.

Credit limit

The maximum amount of money that a bank or other lender will lend to a particular individual or company.

Creditor

A person or organization that lends money to others.

Creditworthiness

A creditor's measure of a borrower's ability to meet debt obligations.

Cumulative total return

The performance of an investment over a stated period of time.

Current assets

Assets that are easily convertible to cash. Cash, short-term investments, and accounts receivable are asset categories that should result in cash within the next year.

Current liabilities

Debt or other obligations that are payable within a year.

Current ratio

The current ratio provides a speedy indication of a company's ability to meet short-term debt obligations. The higher the ratio, the more liquid the company is, and the better able it is to take care of any short-term debt. To determine the ratio, take current assets and divide by current liabilities.

Current yield

As applied to bonds, the annual interest rate divided by the current market price.

Cyclical stock

Stock of a company whose performance is generally related (or thought to be related) to the performance of the economy as a whole. Paper, steel, and the automotive stocks are thought to be cyclical because their earnings tend to be hurt when the economy slows and are strong when the economy turns up. Food and drug stocks, on the other hand, are not considered "cyclicals," as consumers pretty much need to eat and care for their health regardless of the performance of the economy.